masters in engineering and management of technology masters in engineering design

Masters in Engineering and Management of Technology

Masters in engineering Design

Entrepreneurship and New Venture Creation

Rui Baptista

Analyzing New Ventures:Opportunity Screening

Entrepreneurship - Rui Baptista3

Anchors of Superior Business

They create or add significant value to a customer or end user

They solve a significant problem, or meet a significant want or need, for which someone is willing to pay a premium

They are a good fit with the founder and management team at the time, as well as with the marketplace and the risk-reward balance

They have robust market, margin, and moneymaking characteristics


Timmons’ Opportunity Criteria

Industry and Market Issues Economics and harvest issues Competitive advantage issues Management team fit Fatal flaws/Overall assessment Strategic Differentiation


Venture Criteria: Questions to be Answered (I)

Product/service creates or adds significant value to

customer or end-user solves a significant problem / need for

which the customer is willing to pay a premium

Customers are reachable and receptive Product life is durable Robust market in terms of potential

revenues and margins


Venture Criteria: Questions to be Answered (II)

Competitive advantages exist: “First mover” advantages Control over prices or costs Patents or trade secrets Special know-how Special relationships with customers or suppliers Contractual advantages

Attractive value creation and realization: Offers attractive returns for investors (ROI) Has low to moderate capitalization needs that are fundable Has a viable exit strategy Risk/reward balance


Screening Criteria: Customer/Market Need/Problem Customer Description/Identifiable and Reachable User Benefit Demand Durability Market Structure Market Size Market Growth Market Trends Market Capacity Market Share Attainable


Screening Criteria: Competitors/Competitive Advantage

Competitor AssessmentBarriers to EntryCompetitive Lead TimeCompetitive Advantage

• Cost/Price• Channels• Proprietary Technology• Lead Time• Service• Contracts/Contacts• Key People


Screening Criteria: Economics and Financial Issues

Gross/Profit MarginsEBITSustainabilityTime to Positive Cash FlowROICapital Requirements/Resource NeedsGradual Resource UsageScalability of Investment


Screening Criteria: Harvest/Exit

Strategic ValueValuation of Assets and Capital CostsExit PossibilitiesCapital Market Timing


Screening Criteria: Management

Entrepreneurial SkillsIndustry and TechnicalIntegrity and Intellectual HonestyAbility to Work TogetherBalanced in Team Roles and StylesGoal Alignment

Team Skills Management Holes/Gaps


Screening Criteria: Personal Fit

Risk/RewardGoalsTiming/Opportunity CostsStress and Life Style Issues


Screening Criteria: Overall Assessment

Fit between Opportunity-Team-ResourcesUpside-Downside RiskFatal FlawsGo/No Go


First-Mover Advantage in the Assessment of New Venture Opportunities

Lead Times: new ventures introducing new products/technologies benefit from high barriers to entry being more likely to survive because high barriers provide long lead times for ventures to get established

Entry Timing: pioneers have a disadvantage because they face greater uncertainty (lower financing) and greater customer reluctance to buy, and therefore experience greater costs to enter


First Mover Advantage: Myth or Reality

First mover advantages are based on the ability to:

Lock in customersBuild relationships with customers,

suppliers and partnerships to build brand and increase market share

Learn to operate and achieve advantages over competitors

Influence business practicesGarner industry attention


Sustainability of First Mover Advantage (I)

Such advantages may not hold if:Customers don’t perceive switching costsPioneers face significant resistance from

customers or there are high training or market education costs

Pioneer products are poor and produce customer dissatisfaction

Newer technologies replace pioneering technologies


Sustainability of First Mover Advantage (II)

Such advantages may not hold if:Single strong competitor reduces margins for

pioneering companiesExisting larger competitors can easily

develop competing capabilities – no protected intellectual property

Competitors can withstand financial losses better than pioneer


Sustainability of First Mover Advantage (III)

Such advantages may not hold if:Pioneer products don’t have significant cost

or differentiation advantagesPioneers are not able to develop

organizational and corporate capabilities to exploit technologies

Unsustainable first mover advantage benefits “fast seconds”


Fast Second: Technological Knowledge as a Public Good

Non-rivalry: the cost of replicating new technology is usually trivial when compared with the cost of creating it in the first place

Incomplete Excludability: property rights can be assigned by law to the creators of new ideas; however, technology determines how easy it is to prevent unauthorized use

This means that a “fast second” firm may reach the market with a new product reaping some of the benefits of innovation without facing its costs


The Timing of Innovation and the Fast Second Advantage

The larger the expected profit from introduction, the greater the probability of innovating first

The smaller the profit from the present product/technology, the greater the probability of innovating first

The larger the difference between present and expected profits (after introduction), the greater the loss from being beaten to the market


A Simple Model of the Timing of Innovation

T* T

RevenuesCosts

V - Total Net Revenue

D - Total R&D Costs

V1

T1*

V2


Case – Securities OnLine: Customer/Market

Product: rapid, easily accessible informaton on emerging East European capital markets (higher risk/return–greater demand for information)

Customers: financial/business/legal/data services – sophisticated, diverse, geographically dispersed financial operators + advertisers

Opportunity: customers’ frustration with current lack of resources/information

Large market with high potential for growth Customers are multiple users and have low switching costs Demand subject to international fluctuations in economic

growth and financial markets


Case – Securities OnLine: Industry (I)

Competition: inexistent/weak in the market presently; increasing in the near future (reduced lead time)

Low barriers to entry Sources of competitive advantage:

First mover advantage Technology: low entry costs, low operation costs (but possibly

growing as scope of services widens) Product differentiation: quality content and presentation, fast

distribution, segmentation per type of customer and type of information

Entrepreneurial team dominates both product content and distribution technology


Case – Securities OnLine: Industry (II)

Risks: Low barriers to entry – increased competition eroding first-

mover advantage Low switching costs – limits to product differentiation Large information providers (Reuters, Bloomberg) may

enter the market soon with the advantage of established customer base

Technology risk: quality and quantitiy of content vs. quick internet access; security and integrity of data

Political instability and economic fluctuations


Case – Securities OnLine: Economics and Financial Issues

Low investment requirements: $0.514M in the conservative scenario (C); $1,022M in the agressive scenario (A)

Gradual resource usage; high scale economies Quick to positive cash-flow: 14 months (C); 13 months (A) EBIT: $0.7M (C); $1.3M (A) by year 3 Expected ROI by year 3: 36% (C); -31,5% (A) Expected Sales Margin by year 3: 24% (C); 26% (A) Sustainability: strongly conditioned by risk – low barriers to

entry; low switching costs; increasing competition; political and economic instability

Discounted Expected Cash-Flow (DCF): $2.5M (C); $5.5M


Case – Securities OnLine: Harvest/Exit Issues

Exit possibilities: Merger vs. IPO vs. Venture Capital

Potential investors:Large financial information providersLarge multimedia companies (financial cable

chanells)Associated customers: financial services (First

Boston, ING); information providers (FT)Local (East European) investors


Case – Securities OnLine: Management Team/Personal Fit

Strong technical skills Low entrepreneurial experience, partially

compensated by the advisory board Ability to commit, giving up highly paid

corporate jobs Question: ability to extend human resources

and management team with the same level of skills


Case – Securities OnLine: Overall Assessment

Good fit between opportunity, team and resources as regards market and technology

Strong/average upside – first mover advantage, good established connections, but average/low initial revenues as customer base grows

Strong downside: exit through acquisition of strategic assets: customer base and human resources

Possible flaws: co-ordination of geographically dispersed team and

customer base Risk of internet capital market bubble bursting

masters in engineering and management of technology masters in engineering design

Documents

significant value

significant problem

significant want

market issueseconomics

durablerobust market

team roles

new productstechnologies

receptiveproduct life